Ola starts making money on each ride, inches closer to profitability

India’s largest ride-hailing application Ola is inching closer to profitability as the company targets a public offering in the coming years even as its battle for market domination continues with US-based Uber

Ola has started making money on each cab ride — a major milestone — after taking into account expenses such as driver incentives and customer discounts.

But the company still has a long way to go towards profitability, which would mean recovering expenses for salaries and technology, according to three sources briefed on the matter. Ola is targeting profitability by year-end.

“Last week, our India business crossed a major milestone. We are now ENTR positive,” Ola CEO Bhavish Aggarwal wrote in an email to his team late last month. ENTR stands for effective net take rate, an important metric for ride-hailing companies.

Take rate is the commission charged by companies like Ola and Uber from their drivers, and ENTR is the take rate after taking away costs like discounts per ride. At the peak of the ride-hailing battle in 2015 and 2016, the companies were losing Rs 100-200 per ride, according to industry executives.

“This milestone has come after a consistent and persistent effort that all of you contributed in, and we’ve been able to achieve it keeping market share and growth steady,” Aggarwal wrote in the email to his team.

Driver Incentives Drop, Vary Across Cities

He underlined the point that the company has not sacrificed top line growth or ceded market share to Uber to achieve this goal.

Aggarwal said in the email that Ola is aiming to become profitable this year. “We will continue to focus on profitable and sustainable growth, and building a growing profitable business, the first in Indian internet,” he wrote.

Internet companies measure breakeven and losses on weekly and monthly basis, and making money for a certain period does not necessarily make a company profitable for an entire financial year. An Ola spokesperson did not respond to email queries from ET.

Reaching profitability will not be easy, but the milestone would mean that for every incremental ride Ola completes it will move closer to profitability rather than losing more money.

Ola’s operating loss increased 32% to Rs 3,731 crore in FY17 while operating revenue more than doubled to Rs 1,178 crore. While the company curtailed variable costs such as advertising and promotion expenses to Rs 285 crore from Rs 438 crore in the year before, fixed costs such as salary expenses increased to Rs 572 crore from Rs 461 crore, according to the company’s filings with the ministry of corporate affairs (MCA).

Other expenses, which has not been specially defined, dramatically shot up toRs 4,052 crore from Rs 2,422 crore. Exact financials for FY18 could not be ascertained.

Ola has projected net operating loss of Rs 1,235 crore for the year ending March 2019 and profit of Rs 746 crore for the year ending March 2020, according to its latest valuation report filed with MCA for stock acquisition of public transport ticketing application Ridlr.

Ola has not only cut discounts to consumers almost entirely but is also aggressively pushing its subscription services such as Select and Share Pass to get money upfront.

“The biggest difference between Ola and Uber is that Ola has understood how Indian consumers behave differently from global consumers and innovated for India market,” said Ritesh Banglani, partner at venture firm Stellaris, citing Ola’s move to take cash in the early days to launch of entertainment service Ola Play more recently. “This is a milestone because it proves that the war will not be won on just on discounts but also on technology and innovation.”

For the cab-hailing industry, driver incentives have dropped to less than 20% of the gross booking value from about 60% at the end of 2016, according to Redseer.

“(Driver incentives have) come down as compared with the same time last year. In 2017, it was 25-30%. But this time, it is pegged at15-20%. It also varies as per geography. For example, in March, Ola offered higher commissions in Bengaluru and Uber in Delhi,” said Ujjwal Chaudhry, engagement manager at Redseer, adding that on an average, Uber’s incentives to drivers are higher than that of Ola’s.

Ola is also in the final stages of completing a secondary sale of shares to Singapore’s sovereign wealth fund Temasek, which is picking up an undisclosed stake for around $150 million, according to two sources directly briefed on the matter.

Some Ola employees are also getting liquidity as a part of this round, besides angel investor Rehan Yar Khan and VC investors who got stocks in Ola after its acquisition of Taxiforsure in 2015. These investors include venture firms Accel India, Bessemer Venture Partners, Helion Venture Partners and the Taxiforsure founders Aprameya Radhakrishna and Raghunandan G, who are making a partial exit, as ET reported in February.